Turkey: The month of one-offs

The headline deficit exceeded forecasts significantly, but there is a reason behind this: Turkey’s current account deficit is high and it has been widening decisively over the past year. A deficit of approximately 7.5% of GDP this year is very likely, and we believe that it is fully priced in. With the recent rise in commodity prices, Turkey’s C/A came under the spotlight and all numbers are being heavily scrutinised, given the unorthodox monetary policy approach by the CBT. There is nothing new here. However, when the March headline current account deficit came out at a record US$9.8 billion against the expected US$8.2 billion, there was a significant negative reaction in the market and the currency weakened some 1%.

Likely to be a one-off issue: Looking at the details of the balance of payments data, we noticed two issues that made the weak headline number look somewhat less worrisome. First, the income account posted a sharp outflow of US$1.9 billion in March that was highly unusual, reflecting the repatriation of profits (such as dividends) on foreign investors’ investments in Turkey. We do not know details of any specific transactions. However, we know that under normal circumstances the monthly reading of this account should have been around US$0.5 billion. Hence, the US$1.4 billion deviation here resulted in the main surprise about the headline. We think that this will be a one-off issue and will not be repeated any time in the near future. Second, foreign direct investment (FDI) posted the highest monthly inflow of the past three years at US$2.6 billion in March, more than offsetting the adverse impact of the outflow posted in the income account. Since there were some banking sector-related transactions in March, we associate this FDI inflow with that. Indeed, there is a possibility that the high FDI inflow and the surprise outflow in the income account might have been related. At any rate, the high FDI inflow is also likely to be a one-off matter, as we do not expect any sizeable FDI transactions to materialise soon.

Looking at the details of the balance of payments, we see the following points to be noteworthy to mention:

1) The headline deficit: At US$9.8 billion, the deficit was a record high, but as we mentioned earlier this is likely to be a one-off matter and will correct starting with April data. That said, even the consensus expectation of US$8.2 billion would be considered a very high monthly print, and it seems clear to us that Turkey’s current account deficit is too high. The 12-month rolling current account deficit reached a massive US$60.6 billion (around 7.5% of GDP) and is unlikely to decline any time in the next six months, in our view.

2) The non-energy component of the deficit is reaching worrisome levels and should be addressed more forcefully: It is a fact that Turkey’s widening current account deficit had been on the back of rising energy prices. However, with March data at hand, we see the non-energy component also hitting a record-high number (even if the one-off factors are corrected for).

3) FDI inflows reached a 40-month high: At US$2.6 billion, FDI inflows helped financing to a significant extent and was a partial relief to the pain associated with the headline print. However, this is likely to be a one-off jump in the near term and not the beginning of a trend, we think.

4) Portfolio inflows also posted an all-time high: At US$5.2 billion, there was a massive inflow of capital that funded the current account deficit to a significant extent. At first sight, the number might look worrisome and suggest that the deficit was being financed by ‘hot money’. This is not the case, in our view. Out of the US$5.2 billion figure, US$2.2 billion was associated with the recent 10-year Samurai bond issue by the Republic of the Turkey. We would not consider this financing as short term or hot. Hence, this was also a one-off jump, in our view.

5) Net errors went through some revision: The unaccounted flows in the first two months of the year stood at a significant US$5.5 billion. With the March data release these were revised down to US$3.4 billion and spread around certain capital account items. The March net error term was also positive but slightly lower at US$950 million, which brought the 1Q11 cumulative number to US$4.3 billion.

6) Reserve accumulation at record high as well: Overall, despite the record-high current account deficit, the inflows from FDI, portfolio flows and other financing (corporate and banking sector borrowing) were very strong and resulted in a monthly rise of US$3.1 billion in reserves. The 12-month rolling cumulative reserve rise amounted to US$15.8 billion.